Whether you aim to get out of debt, improve your credit, prepare for the future, or just become more financially secure; a budget is the bread and butter of financial success.
Too many Australians, however, either don’t keep a budget or don’t know the best practices to maintain a successful and effective budget.
Getting to the point that you have complete mastery over your finances with a budget will require some hard work, but you’ll reap dividends in the long run in terms of money, time, and peace of mind.
To that end, we’ve created this guide to walk you through the necessary steps of creating a budget. If you follow this advice and stick with it, you’ll be on the path to a better financial future in no time.
Along the way, you will need to take stock of many details of your life, and it can be a frustrating experience. In those moments, remind yourself of why you’re committing to a budget, and that the rewards will lead to many years of success and happiness, as well as providing effectively for your loved ones.
Why Create a Financial Budget?
We’ve already discussed the broad-focus benefits of budgeting. Now let’s take a closer look at what creating and maintaining a budget really does, and why that’s important.
A well-prepared budget details the money you have coming in, and the money you have going out: income and expenditures. However, when many people think of “income,” they think of their paychecks. Likewise, when they think of “expenditures,” they think of bills and rent.
In reality, income and expenditures are any routine movement of money. Having a full picture of these transactions can identify a few key patterns. The most obvious is whether or not you’re happy with this flow of money. Perhaps just seeing how much you’re spending on a given item will surprise you.
As the saying goes, the devil is in the details. So long as your budget (or lack thereof) remains a collection of disparate details, you won’t see the big picture of how your decisions are impacting your life.
A budget allows you to make projections. For example, if you plan to purchase a car in the future, a budget will let you know when you can afford to make the purchase. A healthy budget will allow you to plan for unexpected events – like when that new car breaks down and you need to start paying off the repairs.
Without a budget, the unexpected leaves us pulling out hair, a budgeted future is one that allows for a clear picture of what the actual impact will be.
Bear in mind, that sometimes the unexpected directly deals with finances. For example, should your identity be stolen, or your primary source of income be eliminated by being made redundant, you already have the necessary command of your finances to tackle the problem.
Lastly, a budget is the only realistic way to accomplish goals. Whether that’s putting your children through university or retiring happily, these monumental moments require savvy planning. A budget is a telescope through which you can view your successful future. And it’s a telescope you can walk away from, without worry, allowing you to cherish the here and now.
In the next step, we’ll move to the technical details of what is needed to create a budget. While the building blocks of the budget require work, don’t forget that the whole purpose of the budget isn’t all the digits that compose it, but rather the innumerable advantages.
How to Create a Budget
Now that the benefits of creating a budget are clear, let’s focus on how you can begin your journey to financial success. You will need to gather a lot of information, but the overall process can be broken down into a few steps. You might be surprised to learn that, while it might take a while to get your budget completed, the overall process is fairly simple.
First, you will want to gather all the records you can of both your income and expenditures, which will require obtaining bank records, credit card bills, and so on. Then, you will compile this information, preferably with the help of modern electronic tools designed to create a more dynamic, flexible budget. Finally, we’ll look at how to keep your budget up to date, so that your hard work will continue to reward you for the rest of your life, and help you achieve all of your goals.
Remember, if you find any step of this overwhelming, it’s okay to take a step back. You’ve gone this long without creating a budget, so you’re allowed to move at your own pace. There are also resources to help you, but before they can help you, it’s best to understand what they’ll be helping you do. So, with all that in mind, let’s break down the steps into manageable pieces.
Step 1: Calculate your total income
Remember that income is more than just your paycheck. It may include government assistance, investment earnings, child support, interest from your savings account, or any other place you derive money. Go over bank statements to ensure you catch everything. Some of these payments may not occur monthly, or even quarterly, so be thorough.
You don’t want to miss a major source of income that you last received 11 months ago. Likewise, you may have an account you rarely use but receives critical payments from time to time.
Step 2: Determine your expenses
Use those same bank statements, as well as credit card statements, receipts and bills to determine both where you’re spending your money, and how much you’re spending.
Common expenses include:
- Mortgage or rent
- Utilities like electricity, gas, internet, water, and mobile phone
- Transportation, including car payment or public transport, tolls, and petrol
- Health insurance, medications, and other medical expenses
- Schooling fees and costs
- Subscriptions to TV or music services
- Gym memberships
- Other club and entertainment memberships
Remember that it’s not sufficient to look at one month or even two. Some expenses might be paid quarterly or annually, especially expenses related to your home, car, or insurance. Additionally, be certain you’re looking at all your accounts. This is important for both income and expenditures, but it’s probably more important to have an accurate picture of your spending, so you don’t create false peace of mind.
Step 3: Set up your budget
Now that you have all the data, it’s time to build your budget. It’s preferable to use an electronic method, whether it’s an online tool, mobile app or computer program, or a spreadsheet so that you can adjust your budget and perform calculations.
You might be surprised to learn that the heavy lifting is already done. At this step, you’ll simply add up all of your income and all of your expenses. Depending on what tool you use, you’ll have different options. If you’re using a spreadsheet, you can arrange the information in whatever configurations make the most sense to you.
Be sure to keep all the information separate. For example, don’t combine medications and insurance. Likewise, if you have entertainment expenditures, like television and music, keep them separate. You may choose to categorise your income and expenditures but keeping them as separate line items allows you the flexibility of adjusting them, and provides a finer, more granular view.
Another advantage of electronic records is that you can keep various “snapshots” of the past in the form of different files or save projections for hypothetical scenarios. Many applications designed for budgeting have these features built in, but you can also simply create multiple spreadsheets based off of your original.
Step 4: Keep it up to date.
You won’t have to deal with this step when you first build your budget but do be sure to check it regularly. Make adjustments as needed.
Many life events will lead to a change in budget, such as:
- Changing jobs or receiving a promotion
- Purchasing a home
- Having a baby
- Getting married (or divorced)
- Losing your job
- Experiencing a disaster
- Medical emergencies
- Losing a loved one
- Adopting a pet
Of course, some of these are major changes and others are not. But even something as simple as adopting a pet might not seem like a big deal for your budget until you start paying vet bills, buying food, and so on. It seems like a lot of work, but you’ll get used to the concept of adding additional expenses as you go.
And remember, since you’ve already built your budget, you’ll only have to adjust the individual line items as needed, not start from scratch. You’ve done the hard part. Now, just remember whenever something changes to take a moment to update it, just as you would a journal or diary.
Using your budget
Now that you have your budget, it’s time to put it to use. This is where your hard work begins to pay off.
First, identify problem areas. Perhaps you’re spending more than you earn. Look for expenditures to cut. Simply creating a budget might have reminded you of some subscriptions you never use, so take care of those now.
Once you’ve cut your expenditures, review your income. Do you have a revenue stream that you could increase? Perhaps there’s some work you do on the side monthly, for example, and you can commit to doing it every fortnight.
Next, identify your goals. Whether it’s a minor purchase within the next year or retirement, you now know how much extra income you have coming in, and you can project how long it will take for you to save enough. To accelerate the process, look for more areas you can make sacrifices or more ways to increase your income.
Depending on your goals, you may want to go into every expenditure with the goal of cutting costs. For example, the next time you pay an insurance bill is an opportunity to shop around. When purchasing groceries, see if you can find alternatives to your most-used items, or perhaps you’re making some purchases out of habit, and you don’t really need them.
The goal here isn’t to make yourself miserable, of course, but to identify patterns of behaviour that don’t benefit you, while costing you money.
Of course, if you have a known problem area, you’ll want to use your budget as a weapon to tackle it. Before you go shopping, review your budget to verify your limits. Make a commitment to stick to it. Indeed, now that you know your limits, you might want to save your pleasure spending for the future.
Getting help with your budget
Never give up if you’re having a hard time with your budget. You’re not alone in budgeting, and there’s a wealth of resources to assist you, both human and technological. This can lead to continued education, increased confidence, and most importantly, the willpower to stick to your budget.
The Internet has a plethora of budget calculators, online lessons, and money managers. Mobile apps abound for a myriad of uses, from future planning to grocery shopping. Check with your financial institutions to see what tools they have. There’s likely plenty of resources and automated tools right on their website.
Likewise, financial advisers, consultants, accountants, and your financial institution are all there to help. When you’re successful, they’re successful. Some fear that getting help with finances is a sign of weakness, or that no one else ever needs help. Nothing could be further from the truth.
On this note, there are many services out there that prey on those who need financial assistance. Don’t let the fear of falling prey to these “services” deter you from getting the help that you need, because they represent the majority. It is wise, however, to educate yourself on what might be warning flags of a less than upstanding service.
Good financial services, no matter whether they’re a working professional like an accountant or an online service, will always make sure that you completely understand everything that you agree to. The moment you have questions or feel uncertain about something, someone looking to help you should step in to make it right.
Lastly, in the age of the internet, most companies can be researched. There are also a wealth of institutions available to assist you, whether you’re looking for incremental help or need to verify the legality or legitimacy of a deal you’ve been offered.
If you have a surplus, you should consider saving these funds rather than splurging on things you don’t need. There’s certainly nothing wrong with rewarding yourself with your hard-earned money, but having a nest egg can safeguard you against unpredictable events.
Many are prone to just keeping their excess funds in their checking account, but stashing your extra money where all of your money sits doesn’t do you any favours and there are better ways to make it work for you. You can even turn it into a handsome profit that better enhances your budget.
There are a lot of ways to keep this money secure, and even increase it. Some of the most common ways include:
- Keep your surplus in a savings account with high interest
- Consider investing
- Look into making super contributions
These are all excellent and popular options. Simply keeping your funds in a high-interest savings account is certainly the easiest, but you could be missing out on a lot of income by not making low-risk investments. If you do choose to go the bank account route, don’t limit yourself to the bank you’re using now.
Chances are you use your current bank because you’ve become accustomed to their service. But remember, you’ll rarely need to use a savings account. So while you should do your due diligence, earning more from your savings is a great reason to shop around.
If you find yourself in the position of having a sizable amount of surplus income, it would be a great idea to pick up some reading material on investing to determine how comfortable you would be with it. The concept of investing in the market or in government bonds is a vast topic beyond the scope of this article, but one of the most common misconceptions is that it takes a lot of knowledge and experience to invest.
These days, investing is as simple as using an app on your mobile phone, and anyone can do it – just make sure that you understand the risks and only invest money that you can afford to lose.
Additionally, you may want to pay off your debts faster. For example, if you have a loan with interest, while you don’t technically need to pay it off early, doing so can save you a lot of money in the long run. You should review the terms of your debts before making this decision, however, as some contracts may impose a fee for paying them off early. It likely won’t negate the interest you’ll be saving, but it’s good to be aware of.
Lastly, remember while you’re looking at your budget that surpluses can also come as windfalls rather than through slow accumulation. Be sure to consider raises in pay, tax refunds, or any other sudden unexpected income as a surplus. It might seem obvious, but sometimes the most obvious sources of extra income are, in fact, so obvious that we don’t think of them that way.
If you have a deficit rather than a surplus, or your finances have become too difficult to control due to too many creditors, there are many solutions available to you to get back on track. One extremely popular option that is seen in the media often is debt consolidation.
If you have many debts, and tracking them and their changes is overwhelming, you may consider debt consolidation. This can be a fantastic option for some people, but it also introduces some risks that may leave you worse off than you started, so exercise caution.
At its core, debt consolidation means rolling all of your debts into one single loan. This can be very attractive if you have a lot of debt, but it can do more harm than good if you’re not careful. For example, the interest you end up paying on a single loan might be substantially more than the combined interest on your separate loans.
Consider the following entirely fictitious example: if you have five credit cards, and they all have interest rates that range from 15% to 20%, it can be a real headache to keep track of payments on all these cards, as well as changes to the cardholder agreements for each one. The concept of paying them off with a single loan, and only worrying about one payment, is very enticing. However, what if the interest rate on that loan is 18%?
As you can see, it’s difficult to determine whether or not that 18% would be a better or worse deal. Of course, if it were, say, 25%, it would be a bad deal, and if it were 10% it would be foolish not to take it, but in financial matters, things are rarely that clear-cut. This is why it’s imperative to be careful with debt consolidation – it can turn a lot of little burdens into one little burden or turn a lot of small troubles into one giant burden.
First, it is important always to do your due diligence and not give in to pressure from salespeople. Often, scammers or dubious businesses will target those who are experiencing financial difficulty, promising loans or services that in theory will help you pay off debt faster or otherwise “take care” of debt or credit problems. Sometimes, these services are legitimate, but you should always understand what you’re getting into. If you feel pressured, walk away.
Rather than jumping into debt consolidation directly, take the following steps first:
- Talk to your lenders – They may be willing to make your repayments more manageable or give you an extension on your loan.
- Transfer credit card balances – You’ll need to do research here, too, because credit card decisions impact your credit., but this might be an excellent way to lower or temporarily even remove interest.
- Consider refinancing – If you have a mortgage, this massive chunk of your expenses could be renegotiated with your new or an existing lender. Obviously, you’ll need to make sure this is a better deal than the one you have.
- Consider selling assets – Depending on what you own, it might be a good idea to sell your home or car. Remember, you can always repurchase these things, you may need a year of riding public transport to get your head above water.
Loan alternatives such as a Line of Credit can also be a great opportunity to help finance projects when necessary when you find yourself in need of an additional cash boost. With a line of credit, interest is only paid on what you spend and repayment schedules can be more flexible than traditional loans.
&Solved is a leading Australian provider of Lines of Credit, find out more about how a Line of Credit could be the ideal financial alternative to loans when you’re in need of a helping hand.
There are other places you can turn other than debt consolidation and other such financial services if you’re having a difficult time getting your finances on track. Here, we’ll take a quick look at what some of those services are and how they can assist you.
A financial counsellor is someone who specialises in budgets. Not only can they help you with your budget, and understanding what the best decisions might be, they can also act as a negotiator. In other words, they will call creditors on your behalf after they’ve reviewed your budget and reviewed your statements and attempt to negotiate debts.
In some instances, a professional may be able to sway a creditor because of your already excellent history, or by convincing a creditor that you are a worthy asset to them. On the other hand, if you are having a legitimately difficult time paying, they may agree to alternative terms because that’s a better deal for them than a default.
You can attempt to negotiate this on your own. A good rule of thumb, however, would be never to tell a creditor that you don’t know how to make your payments, or that you might not be able to meet the requirements. If a creditor has reason to believe that your debts might be out of control, they will be less likely to work with you. At this point, it becomes less of a negotiation, and more of a risk analysis for the creditor.
A financial counsellor is experienced in these negotiations and will avoid the pitfalls of saying something that could act as a red flag from the creditor’s perspective.
An excellent financial counsellor is likely to offer a free initial consultation. At this consultation, you will be able to explain your situation, provide any documentation that you would like, and get an idea of what they can do for you. If you would like to proceed, make sure you have a clear understanding of the costs, and whether or not it is worth spending more money for the chance to improve your financial standing.
Some financial counsellors, given your situation, may even offer guarantees, such that they do not get paid unless you get the desired results. However, you should not count on this.
Creating a solid budget seems like a difficult undertaking, and many are afraid of beginning the process. In reality, while it can require a lot of careful work and planning to set up, it will significantly reduce the amount of time and stress devoted to financial planning in the future. And with the technological innovations of the modern era, it’s never been a better time to create a budget and reap the rewards of automation and user-friendly software.
Whether you’re young and just started your path to financial independence, in the midst of your career, or looking forward at retirement; it’s never too late to start a budget. The lessons learned, including financial temperance, as well as the confidence that it provides, are truly invaluable.
Remember that throughout each step of your financial journey, people and resources are waiting to help you. Indeed, much of the financial industry is built upon service. Given that one of the most common reasons your fellow Australians elect not to make a budget or seek assistance with their finances is fear that no one else does it makes it a self-fulfilling prophecy. There is no shame in seeking financial advice; we are all experts in one thing or another.
We hope that this guide has alleviated some of the stress that comes with the prospect of creating a budget. In the long run, your bank account and your loved ones will all benefit from a decision that, in retrospect, will be shockingly simple compared to the dividends its paid.